Central banks rev-up developmental roles to save economies

Central banks rev-up developmental roles to save economies

Central banks across the world have for centuries, stood in the gap for their citizens in time of crisis. The Coronavirus (COVID-19) pandemic which has ravaged both developing and developed economies is one of such times. The central banks have applied  swift and widespread monetary and fiscal stimulus responses to mitigate the economic crisis and avoid economic recession. Like most central banks around the globe, Central Bank of Nigeria (CBN) responded to the pandemic with monetary stimulus, interest rate reductions among other policies aimed at reducing the burden of loan repayment on businesses, households and reflating the economy, writes COLLINS NWEZE.

The outbreak of Coronavirus (Covid-19) pandemic was a shock of unprecedented size and nature. Lockdowns and containment measures on a global scale led to a sudden halt in economic activity.


Aside job losses, businesses suffered from collapsing productive activities and reduced cash flow, which was particularly acute in sectors such as automotive, retail and travel.

Concerns about household and corporate liquidity, combined with heightened uncertainty, hampered the functioning of key financial market segments.

Hence, the  extraordinary circumstances required central banks across the globe to take unprecedented measures to reflate and support their economies.

Central banks in advanced economies reacted swiftly and forcefully to the Covid-19 pandemic, deploying the full range of crisis tools within weeks.

The initial response focused primarily on easing financial stress and ensuring a smooth flow of credit to the private non-financial sector.

Likewise, the Central Bank of Nigeria (CBN), has put several measures in place to mitigate the economic impact of the Covid-19 shocks on  people, businesses and economy. It is also keeping the banking sector safe and stable while boosting customers’ confidence in the financial system.

CBN Governor, Godwin Emefiele said the apex bank has sustained  broad-based stimulus and liquidity facilities to curb the adverse effects of the Covid-19 shocks  which led the marginal growth in the real Gross Domestic Product (GDP) by 1.87 per cent in the first quarter of 2020 compared with 2.55 and 2.10 per cent in the preceding and corresponding quarters of 2019, respectively.

He said the Manufacturing and non-Manufacturing Purchasing Manager’s Indices (PMIs) also declined significantly to 42.4 and 25.3 index points, respectively, in May 2020, compared with 51.1 and 49.2 index points in March 2020.

Economic Interventions

Emefiele disclosed that under the N100 billion Healthcare Sector Intervention Fund, the CBN has approved and disbursed N10.15 billion for some projects for the establishment of advanced diagnostic and health centres and the expansion of some pharmaceutical plants for essential drugs and intravenous fluids.

As part of the N1trillion intervention targeted at Agriculture and Manufacturing firms, the CBN has disbursed N93.2 billion under the Real Sector Support Fund to boost local manufacturing and production across critical sectors.

This consists of over 44 greenfield and brownfield projects. The CBN has also approved N10.9 billion to 14,331 beneficiaries under the N50 billion Targeted Credit Facility for households and SME’s, out of which N4.1billion has been disbursed to 5,868 successful beneficiaries.

Emefiele said CBN’s efforts have led to gradual improvement in macroeconomic variables particularly the improvement in the equities market, the containment measures of the COVID-19 induced health crisis, as well as, the impact of the increase in crude oil price on the external reserves.

He added: “There is also stability in the banking system shown by the increase in total asset by 18.8 per cent and total deposits by 25.52 per cent (year-on- year).

The performance of the Loan-to-Deposit Ratio (LDR) policy which was introduced in July 2019 showed that total credits increased by N3.1 trillion or 20.45 per cent, with manufacturing, retail & consumer loans, general commerce and agriculture as major beneficiaries”.

Speaking on the development, Director-General at Lagos Chamber of Commerce and Industry, Muda Yusuf, said the CBN  was the first state institution to respond with palliatives for businesses.

“Altogether,  it announced an intervention estimated at about N3.5 trillion. This covered health,  manufacturing,  agriculture, infrastructure and Micro Small and Medium Enterprises .

This is a gesture that deserves to be acknowledged.  But there issues around ease of access which I believe the apex is looking into,” he said.

According to Yusuf, domestic management of the foreign exchange market is critical. He aded that the CBN has been quite bullish on the development finance front and should be commended

Head of Research, Afrinvest West Africa Limited, Abiodun Keripe, said the CBN, like most economic managers around the world, responded with monetary stimulus, interest rate reductions and other policies to reduce the burden of loan repayment on businesses and households.

He said the size of the monetary stimulus and urgency of disbursement is significantly what is different given how small it is relative to the Gross Domestic Product and how long it has taken to get the stimulus across to where it is needed.

“On Forex management, it was good that the CBN responded with an adjustment of rates across the different windows and is deliberating on unifying also.

To further support the economy, the Apex Bank needs to relax the Cash Reserve Requirement for banks, to help boost lending into the real economy,” he said.

According to CBN Deputy Governor, Edward Lametek, there was nothing in his view that could be more urgent than supporting output and employment that had borne the most impact of the pandemic.

He said: “From the monetary end, the robust interventions being implemented by the CBN and other policies which were underway, like the Differentiated Cash Reserves Requirement (DCRR) and the minimum Loan-to-Deposit Ratio (LDR) before the COVID-19 pandemic, would continue to increase and redirect credit to the major growth and employment poles. All of those would benefit the economy more if the orientation of fiscal policy remains complementary”.

Lametek said that in particular, policies and programmes directed at supporting production of import substitutes and increased utilization of available local inputs and intermediates in production processes will give fillip to the real sector interventions by the apex bank.

Also, CBN Deputy Governor, Financial System Stability Directorate, Mrs. Aishah Ahmad, said the output growth in the United States contracted by 4.8 per cent in  first quarter of 2020 against the expected growth of 3.8 per cent with over 40 million job losses as at April 2020.

China’s Gross Domestic Product (GDP) shrank by 6.8 per cent in first quarter of 2020, while the UK economy contracted by 2.0 per cent over the same period.

“Whilst fiscal and monetary authorities across the world continue to implement a spate of measures to contain the virus and mitigate the negative economic effects through fiscal stimulus packages, furlough of workers and sourcing of emergency funding from the IMF/World Bank; much is still uncertain as the economic implications emerge,” she said.

 Steps taken by other central banks

In a report, Paolo Cavallino of Bank for International Settlements, Basel, Switzerland, stated that the overriding goal of central banks was to cushion the inevitable drop in economic activity by ensuring a smooth functioning of the financial system and facilitating the flow of credit to households and firms.

In doing so, central banks performed their traditional crisis role as lenders of last resort to the financial sector. They extended it further to become providers of liquidity to the private non-financial sector.

Cavallino disclosed that between March and April 2020, the five central banks under review deployed the full set of crisis management policies at their disposal (Table 1). They all offered new lending operations, and either extended or inaugurated asset purchase programmes.

The Federal Reserve, the Bank of Canada and the Bank of England also cut interest rates. In addition, the Federal Reserve and, on a lesser scale, the European Central Bank and the Bank of Japan increased the availability of their currencies abroad through swap lines.

Road to economic recovery

Tor ensure speedy economic recovery, the CBN has also developed three-year policy plan.  Emefiele who announced the measures said the Policy Response Timeline will guide Nigeria’s crises management, and orderly rebooting of the economy by relying  homegrown solutions.

In a report titled: Turning COVID-19 Tragedy into an Opportunity for a New Nigeria, the CBN boss said the policy framework will come in three phases- immediate term policy of zero to three months, short-term policy priorities of zero to 12 months and medium-term policy priorities of zero to three years.

Emefiele  said the agricultural policies of the Federal Government are aimed at positioning Nigeria to become a self-sufficient food producer, creating millions of jobs, supplying key markets across the country and dampening the effects of exchange rate movements on local prices.

“That is why in response to COVID-19, the CBN is strengthening the Nigerian economy by providing a combined N3.5 trillion in targeted measures to households, businesses, manufacturers ad healthcare providers.

These measures are deliberately designed to both support the Federal Government’s immediate fight against COVID-19, but also to build a more resilient, more self-reliant Nigerian economy,” he said.

“We do not know what the world will look like after this pandemic. Countries may continue to look inwards and globalization as we know it today may be dead for a generation.

Therefore, as a nation, we cannot afford to continue relying on the world for our food, education and healthcare. This time has come to fully transform Nigeria into a modern, sophisticated and inclusive economy that is self-sufficient.

Rewards the hardworking, but protect the poor and vulnerable, and can compete internationally across a range of strategic sector,” he added.

Achieving this, he said would require building a base of high quality infrastructure, supporting small-holder and large scale agriculture production, creating an ecosystem of factories, storages and logistic companies that move raw materials to factories and use of fiscal priorities to create robust educational system.

According to Emefiele, there was no need to continually rely on the world for anything and everything at any time.

He said now is the time for Nigeria to look inwards as a nation and guarantee food security, high quality and affordable healthcare, and cutting-edge education for the people.

“For a country of over 200 million people, and projected to be about 450 million in a few decades, we can no longer ignore repeated warnings about the dangers that lie ahead if we produce locally, because the security and well-being of our nation is continent on building a well-diversified and inclusive productive economy,” he said.

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